China-Topping Growth Sparks Troubling Flashback in Romania

The last time Romania’s economy outpaced China’s was 2008, shortly before financial crisis engulfed most of the planet. Politicians basked in that success before the Balkan nation also succumbed, eventually requiring a 20 billion-euro ($24 billion) bailout.

Almost a decade later, Romanian growth -- an annual 8.8 percent last quarter -- is once again outshining the world’s second-biggest economy, the result of a consumer-led boom driven by lower taxes and higher state wages. Other gauges such as inflation and the current-account deficit, while concerning, aren’t at the eye-popping levels that preceded the last crash. But some are uneasy.

“This China-type growth should make decision-makers wonder what to do next,” said Ionut Dumitru, chief economist at Raiffeisen Bank Romania SA and head of Romania’s Fiscal Council, an independent body that advises the government on budget policy. “Romania is facing slippages that the financial markets won’t ignore.”

Today’s imbalances aren’t trivial. The budget shortfall is bumping up against the European Union’s limit, consumer demand is boosting imports and swelling the current-account shortfall and consumer-price growth is picking up pace after the first bout of deflation since communism.

Bond yields have already jumped, anticipating the central bank will soon end two years of record-low interest rates. The leu is eastern Europe’s worst performer against the euro this year.

With Romania still the EU’s second-poorest nation a decade after joining, the government says policies such as lifting the minimum wage are needed to bridge the wealth gap to the bloc’s wealthier west. The central bank frets that looser fiscal policy is coming at the expense of investment, which has sagged.

Governor Mugur Isarescu worries the experience of 2008, when Romanian politicians patted themselves on the back for besting China, has been forgotten.

“We’re not against stimulating consumption or raising wages but we must pay attention to the dose -- how much can you accelerate without having to brake sharply?” he said. “How many times do we need to smash our head until we learn the lesson?”